Banking Administration: Importance, Objectives and Functions
Banks, like any company, seek to optimize their resources, this is achieved with the Banking Administration.
As an entrepreneur, you want to feel that your money is safe in the bank, or perhaps at some point, you want to resort to financing.
For this reason, you must know how the administration is carried out in a financial institution.
So make yourself comfortable, because today I will talk to you about this topic.
The points that I will explain are:
- What is the Bank Administration?
- Banking Administration Objectives
- Elements in a Bank Administration
- Importance of the Banking Administration
- Functions of the Bank Administration
To begin, I will teach you what the objectives of the Bank Administration are. I’ll get into them later so PAY ATTENTION.
Banking Administration a way to reduce financial risk.
Let’s start …
What is the Bank Administration?
The bank, like any for-profit company, will seek to maximize its benefits and decrease costs, but with the slight distinction that the risk is high.
Banks work with people’s capital, use their deposits to cover loans at an interest rate that generates a profit.
Can you imagine that the debtor does not pay the borrowed money in the established period? This is one of the greatest risks that any financial institution runs.
So we can say that loans are one of the biggest sources of income, but also a risk.
In addition, there are other types of activities that a bank cannot neglect. I am referring to transactions between banks, futures contracts, operations in other currencies, the purchase of bonds, among others.
These operations must be carefully studied in order to make the most appropriate decisions.
To reduce the risk, the bank administrator must analyze the financial situation of the debtors, using management indicators, such as liquidity.
On the other hand, you must carry out a continuous analysis of the different interest rates, the client portfolio and the creditors. Only by applying the administrative process can you take the bank on the path to success.
This is handled by the bank administration as a social science. It is the one that plans, controls, directs and evaluates all the resources available in the bank so that it meets its objectives.
The analysis of the banking administration is divided into the study of risk management decisions and that of banking regulations. Heffernan, 1996
In summary, this administration seeks liquidity to meet its obligations and to guarantee profitability and sustainability over time, assuming acceptable financial risk.
Banking Administration Objectives
The Banking Administration helps control circulating money according to the country’s economic policies.
Many will think that the banking system is a safe business, receiving money and lending it to others. How easy! But no, it’s not like that.
This is one of the sectors that have the highest risk of loss and this will only be reduced with proper administration.
The main objectives that the bank administration seeks are the following:
- Increase the liquidity of working capital to be able to carry out the functions, not only in the short term but also in time.
- Reduce the different types of risks that affect the operations in the bank and the profitability of the company.
- Maximize return on capital.
- Increase the ability to recover the capital that is in loan capacity.
- Control circulating money according to the country’s economic policies.
- Provide savings security to customers.
- Contribute to the stability of the currency in the country
Elements in a Bank Administration
You may wonder why is it important to know this? And it is that these are the components on which the bank administration is based.
- Financial instruments (assets and liabilities).
- Financial market.
- Financial institutions.
I describe them briefly:
Financial instruments (assets and liabilities)
Before describing to you what are the financial assets and liabilities that are managed in the bank administration, you must be clear that it is a financial instrument.
Well, a financial instrument is one that generates an economic income in the future. For the buyer, it is an asset and for the seller, it becomes a liability.
For example, the money issued by the bank is a liability for the financial institution, but for whoever has it, it is an asset.
These provide liquidity, profitability and risk to the bank.
Let us now see what are assets and liabilities within a bank.
Financial liabilities :
They are those products that allow the bank to obtain resources to function. This money is used to carry out active activities.
The main liability products that a bank has are the deposit and fixed terms.
In this sense, the manager’s decisions are based on deciding how profitable these liabilities are and finding the interest rate that generates the most benefit for the bank.
Financial assets :
We have already seen what the bank does to obtain the resources and to be able to operate, now let us see what it does with that money. I mean active products.
These refer to the way banks finance individuals and companies, thereby obtaining a percentage of profit.
The main financial assets are:
- Bank credit.
- Bank loan.
- Bank advance.
- Bail Bonds.
- Promissory notes.
Financial market :
It is where the active and financial products will be offered and demanded, which I mentioned a moment ago, with the objective of determining prices.
Indeed, it is characterized by creating direct contact between the client and the credit institutions, that is, there are no intermediaries.
The main functions of the financial markets are:
- Give liquidity and profitability to assets.
- Put agents in direct contact with customers.
- Reduce brokerage costs.
Financial institutions :
They are all those mediators and intermediaries that allow satisfying the needs that arise among economic agents.
For example, in the Spanish banking system, there are intermediaries, the Bank of Spain, the National Securities Market Commission (CNMV) and the European Central Bank.
Importance of the Banking Administration
In a healthy economy, people’s income is greater than their expenses, that is, they have a surplus.
That surplus remains in the bank accounts that they have in financial institutions.
Now imagine that the banks will lend the money without previous studies? It would be economic chaos because they would not be able to repay the money from their financial liabilities.
So the importance of applying a bank administration, as a way of creating a perfect combination of the bank’s financial assets and liabilities.
If the bank administration is not applied, there would be no information on the market or economic grounds to stipulate an interest rate.
On the other hand, the risk of banking operations would rise significantly. In effect, this generates a greater exposure of the bank to losses or expenses.
Functions of the Bank Administration
The bank administration seeks to maximize profit as a lucrative company and for this, the following functions are performed:
- Develop the bank’s strategic plan.
- Design the policies and strategies to create and nurture the client portfolio.
- Evaluate credit operations based on the information provided.
- Evaluate the performance of the financial institution, applying management indicators such as liquidity and ROI.
- Manage forms of payment.
- Promote innovation at all levels of the banking institution.
- Find the optimal combination of financial assets and liabilities in the banking institution.
The Banking Administration is the discipline in charge of the most favourable combination of assets and liabilities that the financial institution has.
In this sense, the decisions of the bank administrator are linked to seeking liquidity, profitability and reducing risk in the operations carried out by the entity.
Good bank management will maximize the benefits that the financial institution has and will also contribute to the country’s monetary stability.
I hope I have helped you clarify doubts about the bank administration. Check out other topics on management:
- Risk Management: Functions, Process, Objectives and Importance
- International Business Management: Definition, Objectives and Stages
- Difference Between Public and Private Administration
Thanks for reading.